Institutional investors that have not yet chosen to allocate capital into insurance-linked securities (ILS) should be considering to do so given the diversification benefits that it offers, as well as its attractive risk-return profile, according to Eveline Takken-Somers, Head of Insurance Linked Investments, at Dutch pension fund service provider, PGGM.
Speaking during a webinar briefing presented by broker Aon that examined how third-party capital can help support further growth, resilience and tailored risk transfer across the re/insurance and ILS markets, Takken-Somers set out what would bring more institutional capital into ILS over the next three to five years.
She stressed trust, discipline and transparency.
“I think the main attraction to ILS investors is the diversification benefits,” Takken-Somers explained.
“I think that is one of the reasons why investors that are currently not investors should at least take a look at this asset class. And then on top of that, there’s also a standalone attractive risk-return profile.”
She continued: “What would help investors commit more, or even for new investors to come in? I think my answer would be they would commit more capital if they trust the asset class throughout this full cycle, and that means attractive returns, but also pricing and underwriting discipline in both good and bad years.
“I also believe that transparency is crucial. We need to understand the exposures, the modeling, and the terms. If that isn’t there, I think it becomes very difficult to build trust, also as most investors do need to go to their board in order to have their allocations approved.”
In addition, Takken-Somers said board-level understanding matters for keeping ILS allocations in place.
She also warned that reinsurance can unsettle trustees who aren’t familiar with the market.
“Other elements are strong alignment, meaningful risk retention, and clear coverage, in order to reduce surprises as much as possible,” she continued.
“I think most board members in pension funds or in other sectors are not very familiar with reinsurance, so they get easily spooked in a way, and the best way to solve that is by being as transparent as it can get.
“And then finally, what I also believe would help is simplifying the reinsurance jargon. I think that will also help investors to understand more easily what this industry is about.”
During the webinar, Takken-Somers also said that institutional and investor capital “works best for well-defined tail risks, where investors understand the exposure.” She said it can be especially useful after large loss events, “when balance sheets could possibly become scarce or selective.”
PGGM remains the largest single investor listed in our directory of pension funds and sovereign wealth funds investing in ILS and reinsurance.
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